Why Does Diversification Fail to Reduce Risk When the Returns

question 48

Essay

Why does diversification fail to reduce risk when the returns of the two investments purchased are perfectly positively correlated?

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Definitions:

Variable Manufacturing Costs

Costs that vary directly with the level of production output, including raw materials and direct labor costs.

Fixed Manufacturing Costs

Costs that remain constant regardless of the level of production or sales volume, such as rent and salaries.

Selling Commission

A fee paid to a sales agent or an employee based on the value of sales generated.

Contribution Margin

The amount remaining from sales revenue after variable production costs have been deducted, indicating how much contributes toward covering fixed costs and generating profit.